Big Board Investigating Floor Trades

By PATRICK McGEEHAN

Published: April 18, 2003

The New York Stock Exchange said yesterday that it was investigating the practices of some of its traders, adding to pressure on the exchange's managers to demonstrate that they are protecting the interests of small investors.

The exchange said it was conducting a review of trading by several of its specialist firms, a group of seven companies responsible for maintaining orderly markets in the shares of most of the nation's biggest companies. One of those firms, a unit of the FleetBoston Financial Corporation, suspended a trader this week, but declined to say why.

Disclosure of the trading investigation came after recent troubles the exchange has had in appointing directors, some of whom are supposed to represent the investing public. Lawyers for individual investors, meanwhile, are complaining that the exchange sides with brokerage firms against their clients.

Lawyers for the exchange are due in New York State court next week after intervening in a dispute between Merrill Lynch & Company, which is a member of the exchange, and customers who complained that their Merrill broker mishandled their investments. The exchange stepped in to try to persuade a judge to send the dispute back to an arbitration forum run by the exchange, where Merrill wanted it.

''It gives the appearance of impropriety because it looks like they're taking sides,'' said Mark Tepper, a plaintiffs' lawyer in Fort Lauderdale, Fla., who used to be a prosecutor in the investor protection unit of the New York attorney general's office.

In operating its arbitration forum, the exchange is supposed to serve as a neutral party providing a fair and efficient alternative to the courts for resolving disputes between brokerage firms and their customers or employees. An official of NASD, which operates a bigger securities arbitration forum, said nobody at NASD could recall any intervention by it in a pending arbitration case.

A spokesman for the New York Stock Exchange declined to comment, citing a policy not to comment on pending litigation.

Exchange officials were busy yesterday fielding questions about the trading investigation, which potentially could damage the exchange's reputation as a model for financial markets around the world. Richard A. Grasso, the exchange's longtime chairman and chief executive, said in an interview on CNBC yesterday evening that ''the exchange has not as yet charged anyone with anything,'' though he acknowledged that Fleet had suspended a trader who handled shares of the General Electric Company.

People close to the exchange said that traders on the floor had complained to exchange officials about how specialists were handling orders that came in electronically. These people said that the traders suspected specialists were occasionally ''freezing'' their books of orders to buy and sell shares of some heavily traded stocks, then buying some of the shares and reselling them for a quick profit of a few pennies a share. Doing so would provide virtually risk-free profit for the specialists but would defy the exchange's frequent claim that it is the fairest venue for trading stocks.

Mr. Grasso said the exchange was looking into ''trading patterns'' but declined to say whether any specialists were suspected of front-running customer orders, as the practice of using information about incoming orders to trade profitably for themselves is known. ''Anyone who approaches putting the customer second is going to be off this floor and out of this industry,'' Mr. Grasso said on CNBC.

The exchange board's nominating committee is searching for a ''suitable public representative'' to nominate as a director, Mr. Grasso added. Most of the exchange's directors are exchange officials or senior executives of Wall Street firms or companies whose shares are listed.

Sanford I. Weill, the chairman and chief executive of Citigroup, abruptly withdrew his name last month after Eliot Spitzer, the attorney general of New York, objected. A few days later, Todd Christie, a veteran trader at the exchange, also withdrew from nomination to the exchange board after he suddenly resigned as chief executive of the specialist unit of the Goldman Sachs Group.

People who know Mr. Christie said that he left his job for personal reasons unrelated to the trading investigation. A Goldman Sachs spokesman declined to comment.

On Tuesday, another exchange director, Kenneth G. Langone, ran into trouble when the regulatory arm of NASD charged his investment banking firm, Invemed Associates, with illegally sharing in its customers' profits from trading newly issued stocks. Mr. Langone, who was not named in the NASD suit, said Invemed would contest the charges.

Mr. Spitzer and some critics of the exchange said they would like to see the open seat for a public member filled by someone who will put individual investors' interests first. Seth Lipner, a plaintiffs' lawyer in Garden City, N.Y., said he had seen evidence that the exchange did not put individuals' interests ahead of the interests of brokerage firms.

Mr. Lipner filed a complaint against Merrill Lynch last year in New York Stock Exchange arbitration, contending that a Merrill broker had exposed his clients to unsuitable risk by investing too much of their money in shares of Global Crossing, a telecommunications company that was a highflier in the late 1990's.

Merrill responded by issuing subpoenas to 13 companies, including other brokerage firms, banks and mutual fund companies, seeking information about the finances of his clients, Florence and Nina Platzer. Mr. Lipner wanted to stop Merrill from gathering those documents. He said he asked an exchange official for a letter telling him that if he wanted to quash the subpoenas, he had to go to court; he received such a letter in an earlier case against a different brokerage firm. In the Platzer case, the exchange responded with a one-sentence letter, saying that ''a validly issued subpoena may be quashed and/or enforced only by a court of competent jurisdiction.''

But when Mr. Lipner arrived in state court in Manhattan to face Merrill's lawyers over the subpoenas, he was surprised to find lawyers for the exchange asking to intervene. A Merrill spokesman read a statement that said that the firm had not invited the exchange to intervene but was pleased that it had because the firm thought Mr. Lipner's tactics were improper.

In a brief filed on March 28, lawyers from the Milbank, Tweed, Hadley & McCloy law firm argued that the court should send the dispute back to the arbitrators employed by the exchange. Only a week before, Karen Kupersmith, the senior arbitration counsel for the exchange, told Mr. Tepper in yet another arbitration case the same thing she had told Mr. Lipner: to quash subpoenas, you must go to court.

An exchange spokesman declined to explain the apparent contradiction or to say why the exchange had become involved.

Photo: The trading floor is busy at the New York Stock Exchange, but some lawyers question whether members serve small investors' interests. (Stephen Chernin/Getty Images)(pg. C4)